DCC's energy arm prevents profits from flagging

An 11 per cent drop in revenue might be of concern at many companies but for a fuel distributor such as DCC (DCC), sales are inextricably linked to commodity prices, which were much higher at the start of its last financial year just after Russia’s invasion of Ukraine.

More important was the chunky 29 per cent adjusted operating profit its energy business generated. Although DCC is a seasonal business, with around 65 per cent of its profits weighted to its second half, this helped to keep its full-year forecast on track given the weaker performance of its two other businesses – healthcare and technology, where operating profit declined by 11 per cent and 15 per cent, respectively.

The healthcare arm, which distributes health and beauty products for brands, suffered from a “sustained period of market destocking” that began over a year ago and has gone on longer than expected. However, CFO Kevin Lucey said that it has “seen green shoots in more recent weeks”. Sadly, the same can’t yet be said of the technology arm, where cost-of-living pressures have dampened consumer demand.

DCC's net debt increased by almost £270mn to £1.39bn, reflecting “substantial acquisition activity”. It committed £311mn to buying seven energy businesses in the first half and announced the €160mn (£140mn) purchase of a German LPG distributor, Progas, alongside its results.

This increased spend, coupled with higher interest rates, has pushed up interest charges by around £20mn. Interest rate movements were responsible for about £17mn of this, even though only 40 per cent of DCC's borrowing is through floating rate deals. Most of the remaining 60 per cent has been arranged via the US private placement market, although the company recently secured its first credit rating from S&P Global and Fitch. Lucey said its BBB investment grade rating “provides us with further optionality in terms of group financing in the future”.

DCC has a good track record with investments – it cites a return on capital employed of 19 per cent over 29 years as a public company – and its current valuation of 11-times earnings undervalues the company when compared with its 5-year average of 14-times. Although we saw no real reason to rush in when we made a similar comparison six months ago, its resilience in a tough market and the offer of a decent dividend means that putting money in DCC shares seems like a better option than trying to time a market upturn. Speculative buy.

Last IC view: Hold, 4,752p, 16 May 2023